01 Jun Car Loan with the Upside Down Trade-in

Earlier I wrote here about a North Carolina decision on the provision of the 2005 amendments to the bankruptcy code: Judge Small held that inclusion in a car loan of the unpaid balance on a trade in destroyed the purchase money nature of the loan, and thus permitted the debtor to strip the claim down to the value of the new car.

Judge Marilyn Morgan in San Jose, California just decided Acaya, in which she applied California law on purchase money security interests and car loans to hold that the car lender’s lien can be purchase money in part, and non-purchase money in part, when the loan paid off the negative equity in a trade in. Only the purchase money portion of the loan is protected against strip-down.

Two different judges, two different state laws, two different approaches to the issue of what the “hanging paragraph” in Section 1325 means.

This points up one of my personal complaints about the “new” bankruptcy law: policy issues aside, it is so poorly thought out, and so poorly drafted that we will see innumerable repeats of this scenario of trial courts taking different views of new provisions. This produces uncertainty for bankruptcy lawyers and bankruptcy filers and an enormous expenditure of time and energy trying to pound out just what this new law means.

Cathy Moran, Esq.

I'm a certified specialist in bankruptcy law (California State Bar Board of Legal Specialization) practicing in the San Francisco Bay Area for more than 30 years. In addition to practicing bankruptcy law, I train new practitioners at Bankruptcy Mastery.